Oh, joy. Bitcoin has risen in value once again, hitting $11,000 for the first time since January according to CNBC. This, along with other investors hyping the cryptocurrency up, will mean that every grandmother and taxi driver will once again be wondering whether to “invest.” To which I say: no, no, no. And this means no to pretty much any cryptocurrency and especially no to Bitcoin.
You may have already heard of all the reasons why investing in cryptocurrencies is a terrible idea. It is not an investment any more than one can invest in baseball cards. There are some really crazy ideas baked into the entire concept. It can never be a currency – who would want to be paid in something which could lose a third of its value in a week to a month?
But there is a much simpler, yet even more important reason why you should stay away from cryptocurrencies. The mere process of buying cryptocurrencies, waiting for them to go up in value, and turning them into actual currencies which you use to buy actual things, is fraught with peril, scams, and an appalling lack of regulation and protection for anyone other than the early cryptocurrency players. Here are just some examples and problems which show that buying cryptocurrencies is much different and worse compared to buying a stock.
Scams and Pump and Dumps
Last month, a cryptocurrency startup appeared with the foundations of an interesting new idea to revolutionize the fruit and vegetable industry by building a database on the Ethereum cryptocurrency blockchain so that consumers could track where their produce came from. It had a professional looking website, fan photos, and had multiple blockchain experts involved in the project. It aimed to raise $6.5 million.
Just three days later, all of that was deleted and the Prodeum website consisted of a white space with the single word “penis.” As TNW reported, Prodeum purged all information of itself off the Internet as best as it could, leaving those who had invested in the new idea with nothing. And while Prodeum may be the most blatant example of a scam, it is far from the only one.
Sure, there are public companies which are not exactly the best examples of moral behavior. But your investment into those companies is protected by government regulation. If the company suddenly goes bankrupt, your cash and stocks are insured for up to $500,000. Company leaders are limited in their ability to pump and dump, or use insider trading to gain an unfair advantage over you.
None of that exists with cryptocurrencies, which are not viewed as legal securities under U.S. law. And in fact, the recent increase in Bitcoin’s value was prompted by beliefs that any potential future American regulation will not be as strict. I am sure that will come as great news for those who gave their money to Prodeum or OneCoin and ended up with nothing.
Cryptocurrency Hacking
Let us suppose you do your research, or just decide to straight up buy Bitcoin. You have a wallet full of Bitcoins, along with a private key which keeps your coins safe. That is, until a hacker breaks in, finds your key, and sends your currency to his account, once again leaving you with nothing.
Cryptocurrency advocates love to talk about how blockchain makes their system totally secure, but those claims are absurd given that hackers run rampant within the cryptocurrency world. A single theft last December reported by CNN stole over $70 million worth of bitcoins, and there are numerous stories of similar hacks.
Cryptocurrency advocates may point out that your stocks can be hacked as well, but the supposedly secure blockchain system actually makes things worse. Blockchain transactions cannot be undone, meaning that your cryptocurrencies are permanently lost while a hacked person can get their stocks or money back.
The Real Value of Bitcoin
Here is a seemingly simple question. What is the value of Bitcoin right now?
A quick Google search tells me that at this moment Bitcoin is worth $11159.92. But if I go on Cryptocompare and skip to content, it tells me that Bitcoin is worth $11400.32. And if I check the exchange Bitfinex, Bitcoin is worth $11385.00. What's with the variation?
The answer is that what Cryptocompare does is take an average of a bunch of different cryptocurrency exchanges, but each exchange is actually isolated from one another. This leads to increased volatility and an environment where you cannot just sell a Bitcoin for a set value like you can feel confident you can with a stock. Trading in Bitcoins can also be a difficult process with your bank, which are suspicious of cryptocurrencies due to their potential for money laundering.
In summation: yes, you can buy cryptocurrencies and may be able to make money off of them, and in that sense they are similar to a stock. But cryptocurrencies are far more volatile, more vulnerable to scammers and hackers, and represent nothing of real value, unlike a stock. These are just a few reasons to ignore the constant cryptocurrency hype.